Marsh & McLennan of Cal., Inc. v. City of Los Angeles

• Decision Date: 17 September 1976
• Court: California Court of Appeals Court of Appeals
• Parties: MARSH & McLENNAN OF CALIFORNIA, INC., Plaintiff, Cross-Defendant and Appellant, v. CITY OF LOS ANGELES, a Municipal Corporation, et al., Defendants, Cross-Complainants and Respondents. Civ. 45635.

Page 796

132 Cal.Rptr. 796

62 Cal.App.3d 108

MARSH & McLENNAN OF CALIFORNIA, INC., Plaintiff, Cross-Defendant and Appellant, v. CITY OF LOS ANGELES, a Municipal Corporation, et al., Defendants, Cross-Complainants and Respondents.

Civ. 45635.

Court of Appeal, Second District, Division 5, California.

Sept. 17, 1976.

Walter S. Weiss and Long & Levit, by Richard B. Wolf, Los Angeles, for plaintiff, cross-defendant, and appellant.

Burt S. Pines, City Atty., Thomas Bonaventura, Senior Asst. City Atty. and Richard A. Dawson, Asst. City Atty., for defendants, cross-complainants and respondents City of Los Angeles and Rex Layton.

STEPHENS, Acting Presiding Justice.

Plaintiff appeals from a judgment denying it a refund of business taxes paid to defendant City and from the judgment for defendant City on its cross-complaint to recover taxes for the ensuing years.

Facts

Appellant Marsh & McLennan of California, Inc. filed this action on March 3, 1972, seeking (1) a refund of business taxes paid to respondent City of Los Angeles for the years 1965 through 1969, and (2) a judicial declaration that the commission revenue received by appellant in its capacity as an insurance broker is exempt from such taxation. By cross-complaint respondent City sought to recover the amount due for unpaid tax assessments. The trial court ruled that Los Angeles Municipal Code sections 21.03 and 21.190 (which together impose the tax) are valid, enforceable, and constitutional exercises of the taxing power of the City. The trial court further declared that where appellant is not an insurance agent for each insurer in the association, the City may validly include gross receipts which appellant receives from associations of insurers as gross receipts received in its capacity as insurance broker. The court rendered judgment against appellant in the sum of $28,735.14 for unpaid tax assessments.

Los Angeles Municipal Code section 21.03 ¹ requires that a business tax registration certificate must be obtained and a business tax paid by every person who engages in any of the business or occupations enumerated in subsequent sections. Section 21.03 also provides that the tax is imposed pursuant to the taxing power of the City solely for the purpose of obtaining revenue. Section 21.190 sets forth the rate of tax on independent contractors who are not specifically taxed by other provisions of the Article. That section also provides an exemption for receipts which the City is prohibited from taxing under the Constitution or laws of the State of California. Section 21.190 ² provides, Inter alia:

'(a) . . . For every person engaged in any trade, calling, occupation, vocation, profession or other means of livelihood, as an independent contractor and not as an employee of another, and not specifically taxed by other provisions of this Article, the tax shall be $30.00 per year or fractional part thereof for the $6,000.00 or less of gross receipts . . ..'

'(c) As used in this section, the term 'gross receipts' does not include:

'1. Receipts from a trade, calling, occupation, vocation, profession or other means of livelihood, which this city is prohibited from taxing under the Constitution or laws of the State of California. . . ..'

Section 21.190(c)6 ³ provides that the tax of gross receipts of persons acting as agents or brokers includes only receipts received as commissions, fees earned, or charges made for the performance of any service as agent or broker.

Appellant is engaged in business within the City of Los Angeles as an insurance agent, insurance broker, and surplus line broker, duly licensed to act in such capacities under the California Insurance Code. Respondent City has taxed the commission income of appellant which it received in its capacity as insurance broker, but has considered exempt from such taxation that commission income received by appellant in its capacity as insurance agent; insurance agents having been held exempt from municipal business taxes in Hughes v. City of Los Angeles (1914) 168 Cal. 764, 145 P. 94.

On February 25, 1970, appellant filed a claim with the City for a refund of taxes paid by appellant for February 1965 through February 1969. Appellant's claim was referred to the Tax and Permit Division of the office of the City Clerk. In June 1970, the City audited appellant's books and records for the purpose of determining the validity of the claim, and issued a Notice of Tax Due on September 3, 1970. An informed hearing was held November 25, 1970, at which time the June 1970 audit was discussed. In August 1971, the City performed a revised audit, during which the City Clerk examined general ledgers, business records, and lists of insurance companies with which appellant had agency agreements. ⁴ Where there was no notice of agency appointment on file, commissions which were derived from placing business with insurers were considered taxable broker income. The revised audit generated a second Notice of Tax Due on September 15, 1971. The City levied an assessment against appellant for city business taxes on October 14, 1971. This assessment included receipts received by appellant in its capacity as an insurance broker and surplus line broker, but exempted receipts received by appellant in its capacity of insurance agent.

In a letter dated November 9, 1971, the City Clerk granted appellant's request that a hearing upon the assessment be waived and stated that 'accordingly, the administrative proceedings prescribed by Section 21.16 L.A.M.C. are deemed to have been exhausted.' Appellant filed the instant action on March 3, 1972. ⁵

Discussion

Normally, an agent has the authority to bind the insurer and to execute insurance policies. A broker does not normally have authority to bind, and the insurer must first execute the binder or policy. This distinction was noted by Jay Lloyd, a vice-president of appellant corporation who testified that the general practice is for brokers not to bind or execute a policy without prior authorization from the insurer. Lloyd testified that the difference between an agency agreement and a brokerage agreement is that appellant can bind the insurer with whom it has an agency agreement by executing the policy, whereas in its brokerage capacity appellant has no authority to bind the insurer without prior approval. ⁶ Lloyd further stated that the prime advantage to appellant in having an agency agreement with the insurer is that it facilitates the issuance of the policy or binder. In an agency situation, appellant will negotiate with the underwriter, get his authorization for maximum line, be able to execute the binder, and execute the binder in its office. If a brokerage insurer is involved, the insurer would be required to execute the binder or policy. Lloyd said that there is thus an operational advantage to appellant in having an agency agreement, and that the advantage to the insurer is that it is relieved of issuance of binders and policies. Some insurers issue policies only through agents, while others do not sign an agency agreement with brokers because they do not desire to give the broker the authority to bind them to a risk which they may not desire.

From the sample agency and broker agreements submitted as exhibits, it is apparent that under the agency agreement the insurer grants authority to the agent to receive and accept proposals for insurance and to issue contracts of insurance on policy forms provided by the insurer. The broker agreement recites only that the insurer will 'consider business' offered to it by the broker.

Appellant does not pay the gross premium tax imposed upon insurers by section 28, article 13 of the California Constitution and by California Revenue and Taxation Code section 12201. Appellant does pay the tax imposed upon surplus line brokers by California Insurance Code section 1775.5, and also pays the tax imposed by the California Bank and Tax Law (Rev. & Tax.Code § 23151).

Appellant asserts that the City should be prohibited from taxing commissions received by appellant in its capacity as an insurance broker by virtue of California Constitution article 13, section 28(f). That article provides for a state levy on insurance companys' gross premiums, which tax is in lieu of all other taxes upon insurers. ⁷ California Revenue and Taxation Code section 12204 implements the same provision with identical language.

While neither agents nor brokers are 'insurers' within the definition of the article, article 13, section 28(f) has been held to exempt an insurance agent's commission income from municipal occupation taxes. (Hughes v. City of Los Angeles, supra, 168 Cal. 764, 145 P. 94; see also Groves v. City of Los Angeles, 40 Cal.2d 751, 256 P.2d 309.) Appellant contends that the commission received in its capacity as insurance broker should likewise be exempt because the functions performed by an insurance broker are identical to those functions performed by an insurance agent, whether or not there is on file a Notice of Agency Appointment with the insurance commissioner. Appellant further contends that the city ordinance violates the equal protection clause of the Fourteenth Amendment of the Federal Constitution and Article I, Sections 11 and 21 of the California Constitution by imposing a tax on insurance brokers and not insurance agents; and that the tax is an invalid exercise of the power of a charter city over municipal affairs because the ordinance conflicts with the regulation and taxation of the insurance industry which, appellant asserts, is preempted by the state.

Issues

Three issues are presented on this appeal: (1) whether the functions performed by an insurance broker are identical to those functions performed by an insurance agent so that the exemption from the municipal tax should apply to both groups; (2) whether the separate classification of insurance brokers and agents for taxation purposes is unreasonable and discriminatory; and (3) ...